Gold prices were generally under pressure in April, which was much as expected, but more interestingly was the fact that lower prices ran into good underlying support.

Indeed Gold managed to rebound even in the face of strong gains in equities, which implies there was little rotation from safe haven investments to more risky ones.

In turn this suggests that there is still a lot of investment money sitting on the sidelines that can be channeled into new investments without having to take money out of existing investments. Two events stood out as being particularly bullish for Gold.

Firstly China suddenly revealed it had increased its official Gold holdings by 76% since 2003. Secondly the dollar started to show further signs of weakness, which boosted most commodity prices. This raises the question as to whether we are seeing a flight to hard assets rather than hard currencies?

Long term outlook remains bullish so weakness is likely to be short-lived

In the short to medium term, the market seems to be sensing an economic recovery and on the back of this equity and industrial commodity markets are rallying strongly.

Given this new found optimism, we would expect demand for safe haven investments to wane and there is a risk that this could trigger profit taking. However, overall we

feel it is too early to expect an economic recovery and we see this as a bear market rally only. When this peters out, stress levels will rise again as will demand for safe haven investments.

In addition, with central banks around the world engaging in quantitative easing, we expect inflation concerns and further worries about financial stability, to pick up again. When this happens, Gold is likely to rally sharply as investors once again seek refuge.

Given how popular Gold has already become with people buying Gold coins and bars, there is still potential for a mass of retail buying if the fear factor appears again, which we think it will.

Technical – Trying to push higher

In last month’s report we were looking for further weakness before seeing strength return and basically that’s how things have turned out. Prices fell to $865/oz, but managed to hold above the 200 day moving average and have since traded either side of the rising 100 day moving average. Prices have also recently broken

above resistance at $918/oz and moved above the down trend line. Clearance of $930/oz is now likely to see prices challenge important resistance at $968/oz, which we see as the gate way for $1,000/oz and the highs at $1,032/oz.

However, we are still not convinced that the market is ready to embark on another major rally and in the absence of that then further weakness can not be ruled out. On the downside important support starts at the up trend line at $885/oz and runs down to $865/oz.

Summary – Gold prices are making an attempt at breaking higher, but we are not sure the current climate warrants such a move. With the ETFs appearing to plateau out and with the net long fund position shrinking, we feel there may be more unwinding to be done, especially if the bear market rally in other markets makes further headway.

Overall we would prefer to wait in case further weakness provides a better buying opportunity. This runs the risk of missing the start of next rally, but we could always jump on board if this move goes above $930/oz.